Ailing businesses weigh their options

As bankruptcy laws are poised to tilt in favor of creditors, experts say this is no time to panic. But small business owners will have to make some important decisions soon.

The proposed legislation in Congress is likely to be signed by President George W. Bush and become effective by the end of the year, and companies seeking debt relief will have more difficulty reorganizing and preserving assets.

The best advice is to hire a lawyer and an accountant and begin planning for the new law, which will make it far easier for creditors to seize and sell assets. Lester Ottenheimer, a bankruptcy lawyer in the Buffalo Grove firm Kovitz Shifrin & Waitzman, reports that his case volume is up 25% from a year ago.

"I am explaining the changes in the law to my clients and telling them it's easier to file bankruptcy now than wait for the new law to take effect," Mr. Ottenheimer says. "For those people who have been thinking about bankruptcy for a while, who have exhausted other options, I tell them they might as well file now."

Indeed, other lawyers expect an explosion of filings before the new law takes effect, leading to a possible backlog of cases in U.S. Bankruptcy Court. With the pending legislation allowing less time for reorganization, many observers expect to see a rise in outright liquidations, while hardier companies are likely to piece together so-called prepackaged bankruptcies, in which negotiations with creditors are concluded before a business enters court.

"If you can go into court with a plan for reorganization ready, you can gain a substantial advantage," says James Shein, a lawyer specializing in corporate restructuring at McDermott Will & Emery in Chicago. "On the other hand, you have to hope that your creditors will negotiate with you in the first place. The new law will give them more leverage in court, and some may be inclined to wait and make their demands once the bank-ruptcy process has started."

Small business owners who are worried about receivables should be vigilant, advises Michael Brittain, president of the Chicago affiliate of the National Assn. of Credit Management. When invoices are going unpaid, he says, a company has every right to ask its debtor for current financial statements.

"Watch your accounts closely and be prepared to take steps to protect your receivables," Mr. Brittain advises. "You may get a quicker resolution after the new bankruptcy law takes effect, but that doesn't guarantee you'll recover more money. Remember, in any Chapter 11 filing, most creditors don't come out whole."